merger-modeling

Merger Modeling (Accretion/Dilution)

This skill provides a structured workflow for analyzing the financial impact of an acquisition on the acquirer's Earnings Per Share (EPS).

Workflow

1. Acquisition Assumptions

Define the deal terms:

• Purchase Price: Per share and total transaction value.
• Mix of Consideration: % Cash, % Stock, % Debt.
• Interest Rates: On new debt and foregone interest on cash.
• Stock Price: Acquirer's current price (for share issuance).

2. Pro-forma Income Statement

Combine the financials:

• Revenue: Sum of Acquirer + Target (+ Revenue Synergies).
• EBITDA: Sum of Acquirer + Target (+ Cost Synergies).
• Interest Expense: Existing + New Debt Interest - Foregone Interest on Cash.
• Depreciation & Amortization: Including incremental D&A from asset write-ups.

3. Purchase Price Allocation (PPA)

Account for the premium paid:

• Identified Intangibles: Estimate value of brands, customer lists, technology.
• Goodwill: Excess of purchase price over fair value of net assets.
• Deferred Tax Liability (DTL): Created from asset write-ups.

4. Accretion / Dilution Calculation

• Pro-forma Net Income: Consolidated income after tax and interest.
• New Share Count: Acquirer shares + New shares issued.
• Pro-forma EPS: Pro-forma Net Income / New Share Count.
• % Accretion / (Dilution): (Pro-forma EPS / Standalone EPS) - 1.

5. Synergy Analysis

Calculate the "Breakeven Synergies": The amount of cost savings required to make the deal non-dilutive.

Standard Output Format

## M&A Analysis: [Acquirer] / [Target]

### Transaction Overview
- **Purchase Price**: $[X] ([X]x EBITDA)
- **Mix**: [X]% Cash / [X]% Stock / [X]% Debt
- **Synergies Identified**: $[X]

### Accretion / (Dilution) Results
| Metric | Standalone (Acquirer) | Pro-forma | % Change |
|--------|-----------------------|-----------|----------|
| EPS (Year 1) | $[X] | $[X] | [X]% |
| EPS (Year 2) | $[X] | $[X] | [X]% |

### Synergy Sensitivity
| Synergy Realization | 0% | 50% | 100% |
|---------------------|----|-----|------|
| Accretion / (Dilution) | [X]% | [X]% | [X]% |

### Strategic Commentary
- [Analysis of pro-forma leverage]
- [Risk assessment of synergy capture]
- [Impact on cost of capital]

Quality Standards

• Conservatism: Model synergies on a "phased-in" basis (e.g., 25% Yr 1, 75% Yr 2).
• Fully Diluted: Use treasury stock method for share counts.
• Detail: Break out "Cash EPS" (excluding non-cash amortization) if appropriate.